The overriding objective of assessment function is to ensure that all taxpayers, within a defined tax jurisdiction, are brought into the tax net and assessed correctly in order to plug all possible leakages. Generally, taxpayers are categorized according to the legal status of their businesses which includes the following:
Individuals/Enterprises, usually sole proprietorship or self-employed
Partnership, association of two or more persons coming together in business with a view to making profit.
Corporate Entities/Public Companies, usually limited by shares
Non-Governmental Organizations, usually unlimited or limited by guarantee.
A brief description of each of the above business entities will help in the understanding of their respective duties and obligation under the tax laws.
Individual/Enterprises – This is a taxable person who is chargeable to tax in his own name or in the name of a receiver, or his agent. Usually, the tax affairs of this category of taxpayers are to be handled by the State Internal Revenue Service (SIRS), where the taxable person domiciled or resides. Individuals are assessed to tax under the Personal Income Tax Act (PITA).
Partnership: This category of businesses is assessed to tax under the Personal Income Tax Act (PITA) in the same manner as individuals/enterprise. In Nigeria, Partners are assessed in their individual names, based on the share of partnership profits allocated to them.
Non-Governmental Organizations – These are non-profit making organizations which are qualified for income tax exemption under Section 23(1)(i) of CITA C21 LFN, 2004). They are often unlimited or at best limited by guarantee. These types of organizations have duty to apply for exemption. The form in which NGOs are registered determines which Tax Authority will handle their tax affairs.
Corporate Entities/Public Companies – These are limited liability companies or public companies registered with profit – motive in mind. Their tax affairs are being handled by the Federal Taxing Authority.
Assessment function in an Integrated Tax System is agreed to include filing and assessment duties with respect to all taxes being collected by that office among which are: PPT, CIT, VAT, WHT, CGT etc.
Classes of Assessment
Assessments are normally raised on the Income or Profit of companies or corporation raising from trade or business carried on in Nigeria. Assessment is to be imposed on the ‘‘Profit’’ of an enterprise in relation to an accounting period. There are two (2) principal classes of assessments, namely;
Self-Assessment:- This assessment scheme aims at shifting the duty of raising of assessment to the taxpayers themselves. Under this system, the taxpayer is expected to accompany its tax returns with self-assessment notice and an evidence of payment to the FIRS through appropriate designated collecting bank.
Government Assessment:- This is an assessment raised on behalf of the Government by the Tax Authorities, examples of which are:
Assessment raised in accordance with audited accounts and computations filed by the taxpayers.
Administrative assessment based on physical assessment of the company or profit perceived to be fair and reasonable.
Types of Assessment
Assessments Based on Taxpayers’ Returns
These are assessments based on the information contained in the taxpayer’s returns. The tax computations together with the capital allowances computations are enclosed along with the audited accounts and such assessment could either be self-assessment or government assessment.
Minimum Tax is payable by every company in Nigeria when the total profits of the company from all sources have produced on tax, or tax payable which is less than the minimum tax specified by the law. However, the followings are exempted from the payment of minimum tax:
Companies engaged in agricultural trade or business.
Companies with at least 25% imported equity capital.
Any company for the first four (4) years of its commencement of business.
The rates applicable to companies which are liable to minimum tax is the highest of any of the following:
0.5% of Gross Profit
0.5% of Net Assets
0.25% of Paid-up Share Capital
0.25% of Turnover of up to N500, 000.
If however the turnover is higher than N500, 000, the minimum tax payable will be the highest of the above plus 0.125% of the excess of the turnover above N500, 000.
Treatment of Capital Allowances when Minimum tax is applicable
It is important to note that in any year of assessment when minimum tax is chargeable, the capital allowance due in that tax year must be adjusted against the profit of that year along with the unabsorbed balances brought forward. This treatment is adopted to ensure that the charging of minimum tax does not preclude the deduction from assessable profit and the utilization of capital allowances for that year. The position of the law is that capital allowances should be deducted as far as possible, from the assessable profit of that year and the unabsorbed portion, if any, shall be carried forward.
Minimum Tax on Dormant Cases
Minimum Tax is justified on the theoretical premise that every asset should generate an income and it is applied as an anti-tax avoidance measure. This tax is sometimes referred to as asset tax. Already, it is being applied in that manner during periods of dormancy in the sense that minimum tax is computed and charged on net asset or share capital, whichever is the higher of the two. The aim of this clarification is to ensure uniformity in the application of the law on minimum tax with respect to dormant cases. Minimum tax should be computed although the assessment may be raised when the business eventually recommences.
Best of Judgment Assessment
This is raised where audited accounts and other relevant returns are not submitted within the stipulated time in line with the tax law. It is usually based on “fair and reasonable’’ estimate of income/profit of the preceding year’s results reported by the company.
Where accounts are submitted and the basis of the assessment is faulted, the original assessment earlier made is revised or amended in line with the new information as disclosed in the tax computations.
The Board is empowered to examine the returns submitted by taxpayers in order to ensure that the presentation of the accounting details conform with provisions of the Income Tax Act. Unapproved claims and allowances discovered are disallowed and added back to profit. This, in addition to other information will form the basis for additional assessment. All rules and regulations governing other assessments also apply to additional assessments.
These assessments are raised on the ground of expediency. If the relevant tax authority is of the opinion that such assessments are necessary for any reason of urgency, which may include the following:
Where a case referred to the Board for ruling is yet to be determined.
Imminent liquidation of a company or an intention to dispose of its valuable assets, the result of which may cripple its operation.
Imminent sale or transfer of trade/business of the company to another.
Intended remittances to foreign partners.
Payment being made to a taxpayer who had hither to been evading tax.
Imminent escape by a taxpayer to foreign counties.
in all other cases of emergency.
Assessment on Turnover
Under Section 30(1) (a) and (b) of CITA C21 LFN, 2004, the Board is empowered to assess on the turnover of the taxpayer’s business. Where it appears that the trade or business produces no assessable profits or declare turnover that is less than might be expected to arise from such trade or business. Such an assessment is made by assuming a fair percentage of turnover as assessable or adjusted profit for the year to which capital allowances and other deductions are charged before arriving at total profit, And then applying the current rate of tax to determine tax due for the year.
Assessment Levied on Dividend Provision where no Tax is Computed or Payable
Section 19 of CITA empowers the Board to raise assessment on amount of dividend paid to shareholders as if such dividend declared is the total profit of the company for the year of assessment to which the accounts relates. Such a situation may arise where a company declares dividend to its shareholders when it has no tax payable reported as a result of:
o No total profits; or
o Total profits which are less than the amount of dividend paid.
In all case where dividend is declared, officers should always compare the total profits to the amount of dividend declared.
There are other levies or imposition usually encountered in the course of assessment duties, among which are:
Penalty for Late Returns:
Penalty is normally imposed when a taxpayer’s audited accounts and tax computations are submitted late to the Revenue Authority. The amount of penalty at present is N25,000 for the first month in which the failure occurs and N5000 for each subsequent month of failure. It is a form of assessment raised whenever the returns are submitted late. The amount is subject to review from time to time at the discretion of Government.
This is levy imposed on companies which fail to commence business within six months after their incorporation. The levy is N20, 000 in the first instance and N5000 for any other year, if it still has not commenced business.
It is to be levied when the taxpayer applies for current Tax Clearance Certificate (TCC). Pre-operational levy should not be imposed for any previous years when the Company did not apply for TCC; neither should it be raised in arrears to cover earlier years.
Education Tax Levy:
This is a levy being imposed on all taxable companies in Nigeria to assist Government in the development of education in Nigeria. It is charged at the rate of 2% of the assessable profit and should be assessed alongside the normal tax assessment for each year. Pioneer Companies are usually not assessed to Education Tax in view of the income exemption status from tax payment that they enjoy during the pioneer period.